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date: 12 December 2019

Abstract and Keywords

This article first takes stock of what we know about the patterns observed in Indian development and speculates on the likely scenarios over the next few decades. The main question that the article concerns—and probably the biggest economic policy challenge today—is why has poverty in India declined so slowly? The article suggests that a proximate cause is the size and productivity levels of the informal sector—a bulk of India's labor force is engaged in low-productivity cottage-type activities with little physical or human capital. This hinders productivity. What then is responsible for the existence and continuation of constraints in the informal sector? If the poor incidence of entrepreneurship in the informal sector is because of poor infrastructure and weak financial inclusion, why have governance structures failed to alleviate these constraints? In addition, the formal sector has not expanded at the expense of the informal sector to absorb a greater part of the labor force. The article discusses a host of factors that could explain obstacles to productivity improvements in the informal sector, and hence the low growth–poverty elasticity: caste, collective action, the political economy of Indian democracy, the role of credit markets, and rural urban migration, among others.

Keywords: economic policy challenge, Indian economy, poverty, labor force, entrepreneurship, credit markets

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